What A Pandemic Teaches Us About Multifamily Investments
As we currently live through this unprecedented pandemic known as COVID-19, I want to use this global pause to constructively reevaluate my why – my purpose, my cause – in terms of how I invest my time as a multifamily strategist.
My typical day consists of monitoring transactions; connecting with current and prospective clients; evaluating the market; analyzing properties; and what I consider my most meaningful act – creating original content (this blog) for those invested in local multifamily real estate.
In full admission, I get swept up in the busyness of this business. I check CoStar and MLS obsessively; run sales and rent comparisons in East Bay submarkets; attend as many open houses as my schedule permits (I have an impressive OM collection); and like many of you, do my best to keep frustrations in check when the latest rent control policies are brought forward (I am human, after all).
But with the world changing so suddenly now, our days seem drastically different. My hope for this Shelter In Place initiative is for it to allow all of us the time and space to move beyond the everyday busyness of what we do to uncover the deeper, more meaningful lessons of why we do them.
In doing so, I hope the other side of this crisis reveals a clearer vision of how our investments can better serve: the livelihoods of ourselves, our families, and our business partners; our tenants who find refuge and peace in the homes we provide; our communities we care for; and the industry we all love.
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LESSON #1: RESILIENCE > STABILITY
Six months ago, I met with a dear family friend who, decades prior, had a terrible experience with a multifamily investment in Chicago. As a young successful entrepreneur, he owner-occupied one of the units and found himself caught in the downward spiral of managing an apartment building with no prior experience. Fast-forward decades later – after a successful IPO, formal retirement, and grown family – my dear family friends are fully vested in the stock market, sitting across from me, asking “Why Real Estate?”
As the global stock market experiences another period of volatility, many of us are thinking how these times once again show – arguably even prove – why real estate remains the most resilient of all investments. Yes, some are and will remain partial to stocks (and it’s not my place to persuade anyone otherwise). Yes, stocks have historically yielded considerable gains for investors. And yes, while varying degrees of uncertainty and risk remain in multifamily investing – especially as we contend with complex rent control policies; ever-changing city and statewide ordinances; complicated, tenant-friendly eviction processes; and a market susceptible to the highs and lows of employment – despite all of this, these uncertain times reaffirm why multifamily real estate is indeed our greatest chance at financial resilience.
Resilience, not stability.
I recently read a book by Simon Sinek called The Infinite Game, and in it, he highlights the difference between resilience vs. stability.
“Resilience…is structured to last forever. This is different from…stability. Stability, by its very definition, is about remaining the same. [Stability] can theoretically weather a storm, then come out of it the same as it was before. In more practical terms, when a company is described as stable, it is usually to draw a contrast to another company that is higher risk and higher performing. ‘Slow growth, but stable’ so goes the thinking. But a company built for stability also fails to understand the nature of the Infinite Game, for it is likely still not prepared for the unpredictable – for the new technology, the new competitor, market shift or world events that can, in an instant, derail their strategy. ”
An infinite-minded leader does not simply want to build a company that can weather change but one that can be transformed by it. They want to build a company that embraces surprises and adapts with them. Resilient companies may come out the other end of upheaval entirely different than they were when they went in (and are often grateful for the transformation).
Multifamily real estate, to me, is a deeply personal Infinite Game. To play effectively requires an infinite mindset rather than a finite one. The problem facing our industry today is that too many of us – buyers, sellers, agents – are playing to “win,” “beat the competition,” “be the best” and advance personal goals; all characteristics and traits of a transactional-focused, finite mindset.
Sinek reminds us a winner is only determined when the game ends. For me, my business and my clients, the endgame is the exact opposite of our objectives. So while multifamily investing is built for resilience, and though we have financial interest in the success of our assets, I propose we go beyond that. Let’s go bigger.
“The goal is to keep the game going – to advance something bigger than ourselves; build something strong enough and healthy enough to stay in the game for generations to come.”
Let’s commit ourselves to pushing boundaries and playing for resilience. It’s far greater than stability.
LESSON #2: GOOD THINGS COME IN SMALL PACKAGES
For the past year, as an estimated 4,000 luxury units delivered to market, a significant amount of time has been spent highlighting these developments and their varying effects on Oakland’s housing supply. Many of our clients – the individual and family-owned portfolios – have felt these effects firsthand, from extended vacancy periods to reduced rental rates which, consequently, have reduced cash-flows and overall values.
But while all of us – landlords and tenants alike – hunker down in our respective homes, I wonder if an impending shift is around the corner; one that will swing momentum away from luxury developments back into the favor of Oakland’s smaller landlords?
If protecting ourselves from coronaviruses becomes our new, prioritized social norm, will “shared living” communities hold value with their heavily marketed state-of-the-art, socially-focused amenities?
If job security and employment weigh heavily on the mind of renters, will they continue to justify above market rents for a smaller than average unit in a building of hundreds, even thousands?
Is convenience to downtown and public transit powerful enough to persuade tenants away from comparative units in smaller buildings, with more affordable rents – where privacy and a simpler, safer living environment also translates to a faster path to homeownership and long-term financial freedoms?
While we wait to see if any or all of these favors influence consumer behavior going forward, perhaps the takeaway is to rediscover the value our smaller buildings have to offer. If a more modest lifestyle prevails, and if space and value override convenience, look for the smaller, local landlords to recapture their rightful ground.
LESSON #3: SAFEGUARDS + SOCIAL RESPONSIBILITY
Over the weekend, we received an email from a client who owns a building in Cleveland Heights. He asked:
“Is my multifamily asset considered a ‘flight to safety’ investment or more of a risk now?”
While cities and states rush to impose a moratorium on evictions and rent forgiveness for tenants, owners who have responsibly managed assets in desirable locations and with proper safeguards in place will be able to ride this storm with minimal disruption (see Resilience above). For this reason, we are not too concerned for our friend in Cleveland Heights.
Those who have been more lax in their management style (example: hastily filling vacancies without proper due diligence) will, without a doubt, have a more difficult time. If rent control and tenant-favoring policies were reasons to protect ourselves prior to this pandemic, they are essential practices moving forward. This is critical not only to multifamily investors, but to tenants, the City and the community at large.
While we all have a social responsibility to be empathetic to the vulnerable, timely rent collection allows property owners to responsibly pay mortgages, property taxes, business fees, utilities and operational expenses to ensure the health and safety of their tenants while meeting the dire housing demands for our community. An ability to equally consider both of these practices beyond this pandemic will be critical to the livelihood of so many.
LESSON #4: REAL ESTATE IS MOST POWERFUL WHEN IT BENEFITS EVERYONE
When industry professionals and savvy investors discuss the benefits of multifamily real estate, our conversations are typically financially-driven. “These investments provide financial freedom, secured retirement, multigenerational wealth and tax relief,” we say. Less obvious, less acknowledged and too often forgotten is this fact: by nature, multifamily real estate is powerful because of the fundamental human components tied to every investment.
What I love about multifamily real estate, and specifically serving individuals and family portfolios, is that action is almost always taken with others in mind. I have the privilege of helping people achieve wealth for their loved ones – for their children and their grandchildren – which is an extremely powerful, motivating factor for me. But there is something far greater to consider…
Regardless of price, submarket, cap rate, scheduled rents, cash-flows, expenses, rent control, tenant protections, and ordinances, we - the buyers, sellers & brokers - all play an integral role in providing comfort, safety and a sense of pride to many people in our community. What we do, and why we do it, has a far greater, overarching impact beyond ourselves and our inner circle.
“The responsibility of business is to use its will and resources to advance a cause greater than itself, protect the people and places in which it operates, and generate more resources so it can continue doing those things for as long as possible.”
So, in the coming weeks and months ahead, let’s go beyond what we do, and the financial gains of why we do them, and remember the significance:
To the owners, landlords, and multifamily investors: you create safe havens for the valued healthcare providers and first responders on the frontlines; the small business owners who keep our communities thriving; the educators who teach and care for our children; and the prideful families who give thanks for the roof over their heads. You provide steady employment for management companies tasked with protecting your investment; service providers who keep all the moving parts in operating order; and handymen and women who rely on jobs for their livelihood. More importantly, you contribute to a beautifully diverse community in dire need of sustainable housing at a critical point in time when “home” means so much.
And to me, the multifamily strategist: when you find yourself caught in the busyness of your day, or on the receiving end of “Why Real Estate?,” remember to lead with an infinite mindset and with your why – your purpose, your cause: to create opportunities so people can give their best to the world.
Because real estate is most powerful when it benefits everyone.
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Wishing you and your families health & safety. If this article resonated with you, or you have personal thoughts, feel free to drop me a line and get in touch below.